Geographical structure of foreign investment in the Russia’s economy in the first six months of 2005 (the data for the first six months of 2004 are presented in brackets) USA; 3,4% (6,4%) Germany; 4,5% (4,3%) Other countries;

Over this period, investment from the USA decreased 2.1 times and made US $ 569 million, from France – 3.8 times down to US $ 376 million, while German investment fell by 10.7 per cent to US $ 735 million.

At the same time, similarly to the situation observed in the first six moths of 2004, the share of the 10 largest investors made more than 87.3 per cent of the total amount of investment accumulated by July 1 (85.9 per cent in the first six months of 2004). The top ten countries exporting capital in Russia account for 86.1 per cent (82.3 per cent in the first six months of 2004) of accumulated foreign direct investment, 89.7 per cent (83.3 per cent) and 88.3 per cent (88.6 per cent) of portfolio and “other” investment respectively.

Following the suit of the international ranking agency Fitch (which increased the Russia’s ranking by one grade above the minimal “investment” level from BBB- to BBB), the agency Moody’s also declared its intention to increase the Russia’s credit ranking within two months. Higher credit rankings granted to Russia by the leading ranking agencies will have a positive impact on the investment climate in Russia in the future and will facilitate enhancement of investment activity in the Russian economy.

E. M. Ilyukhina The Real Sector of the Economy: Major Factors and Trends In the first six months of 2005, the amount of Russia’s GDP made Rub. 9395.0 billion in current prices and increased by 5.7 per cent in comparison with the figures registered in the respective period of the preceding year.

The slowdown of the rates of growth in exports was a major factor behind the changes in the structure of GDP utilization. In contradistinction to the situation observed in 2004, external demand has lost its leading positions as concerns the formation of proportions of GDP utilization. This year, economic growth was supported by the outpacing rates of expansion of domestic demand. By the end of the first quarter of 2005, the increase in domestic demand made 7.2 per cent, while in the 2nd quarter domestic demand grew by 9.4 per cent. The expansion of the rates of growth in domestic demand was determined by positive dynamics of both domestic production and imports.

The slowdown in the rates of economic growth to 5.2 per cent registered in the 1st quarter of stopped, and in the 2nd quarter of 2005 there was observed a growth in production (by 6.1 per cent).

While in the 1st quarter of this year the slowdown in the rates of increase in GDP was initiated by decelerating rates of growth in export of oil and enhancement of investment activity, in the 2nd quarter the simultaneous acceleration of the rates of growth in demand of households and investments in fixed assets positively affected macroeconomic indicators. In the first six months of 2005, the amount of Russia’s GDP made Rub. 9395.0 billion in current prices and increased by 5.7 per cent in comparison with the figures registered in the respective period of the preceding year. According to the estimates presented by the RF Ministry of Economic Development and Trade, at the background of increasing investment and domestic demand the rates of growth in GDP in the second six months of 2005 will make up to 6.2 per cent, while over the year the rates of growth will make 5.9 per cent as compared with 7.2 per cent registered in the preceding year.

The structure of the GDP produced in 2005 was dominated by the slowdown in the rates of growth demonstrated by industry and construction, which was not compensated by persistence of stable dynamics of the turnover of trade and services.

Table GDP growth indices across sectors of the economy in the first six months of 2004 and 2005, in % of the figures registered in the respective period of the preceding year 2004 1st quar- 2nd First six 1st quar- 2nd quar- First six ter quarter months of ter ter months of the year the year Gross Domestic Product 107,6 107,7 107,6 105,2 106,1 105,Extraction of mineral resources 107,9 108,2 108,1 103 101,2 102,Manufacturing industries 109,6 108,4 108,9 99,6 102,8 101,Production and distribution 99,6 103,5 101,2 100,6 100,7 100,Construction 113,9 114,7 114,3 104,6 106,6 105,Wholesale and retail trade 109,5 110,5 110 109,4 110,8 110,Transport and communications 109,4 111,7 110,6 106,2 106,8 106,Financial activities 111,3 111 111,2 102,5 103,8 103,Operations concerning real estate, 107,7 105,8 106,7 104,4 107,3 105,lease, and provision of services State administration, defense security, 103,2 103,7 103,4 108,3 102,7 105,and mandatory social security Education 101,4 101,5 101,5 100,9 102,9 101,Health care and provision of social 100,5 101,6 101,1 101,9 102 services Provision of communal, social, and 103,7 105,4 104,5 114,1 105,5 109,personal services Net taxes on products 108,7 105,4 106,9 107,7 109,7 108,Source: Federal Service for State Statistics The major factors behind structural shifts in GDP utilization have been high dynamics of external and domestic demand. The economic situation observed in the first six months of 2005 was still positively affected by the exclusively favorable foreign business developments. However, due to the high level of concentration of export proceeds in a narrow group of raw materials, the dependence of the rates of economic growth on both levels of demand and price fluctuations on the world market, and production capacities of extracting industries also increased significantly. The growth in the amounts of exports observed in January through July of 2005 made 39.1 per cent, what was by almost 10.0 p. p.

above the level registered in the preceding year. It should be noted that almost 4/5 of the increase in export of goods was explained by high prices of fuel and energy resources, metal ores, and metals observed on the world market. In January through July of 2005, the balanced financial results of the economy at large grew 1.4 times in comparison with the figures registered in the respective period of the preceding year (as concerns extraction of mineral resources, the increase made 1.88 times, while in manufacturing industries the growth made 1.2 times). In the first six months of 2005, the profitability of product sales across the industries engaged in extraction of fuel and energy resources made 27.6 per cent, those engaged in extraction of metal ores and other mineral resources demonstrated profitability at 34.9 per cent, while the average profitability of the economy at large was registered at 9.7 per cent.

However, the increase in proceeds derived from export operations had not significantly affected the rates of economic growth.

In the situation of growing tax burden, across oil companies there was observed deterioration of incentives to increase volumes of extraction and exports. In January through August of 2005, the index of production characterizing the extraction of mineral resources slowed down its growth to 101.2 per cent, including growth in oil extraction declining to 101.8 per cent and production of metal ores decelerated down to 97.3 per cent. Accordingly, these developments resulted in a decline in the rates of increase in export of oil in volume terms to 100.7 per cent in comparison with 104.2 per cent observed in the respective period of the preceding year. The slowing down of the rates of growth in exports was a major factor behind the changes in the structure of GDP utilization. In contradistinction to the situation observed in 2004, external demand has lost its leading positions as concerned utilization of GDP.

This year, economic growth was supported by the outpacing rates of expansion of domestic demand. By the end of the first quarter of 2005, the increase in domestic demand made 7.2 per cent, while in the 2nd quarter domestic demand grew by 9.4 per cent. The expansion of the rates of growth in domestic demand was determined by positive dynamics of both domestic production and imports. This year, there was registered a gradual increase in the rates of growth of domestic production from 4.per cent observed in the 1st quarter to 6.3 per cent in the 2nd quarter as compared with 3.9 per cent registered in the second six months of 2004. As a result, the share of domestic production in the structure of sources of satisfaction of growth in domestic demand increased from 32 per cent in the second six months of 2004 to 48 per cent in the 1st quarter and 49.5 per cent in the second quarter of this year, while the share of imports respectively declined from 68 per cent to 52 per cent and 50.5 per cent. In January through August of 2005, the growth registered across manufacturing industries made 105.per cent.

However, in the course of analysis of these indicators it should be taken into account that the structure of formation of resources of the domestic market became increasingly affected by differentiation of the rates of growth in production of consumer and investment goods.

Over the last few years, a specific feature of the development of the Russian economy has been moderate dynamics of output of domestic consumer goods. In January through August of 2005, the rates of growth in production of food products made 104.6 per cent, while the output of non-food items declined by about 3.5 per cent.

Competitive power of Russian goods has been determined by inertial processes of post-crisis adaptation of production to the structure of consumer preferences and active measures aimed at modernization and reconstruction of production taken in 2000 through 2003. As concerns the rates of renewal of fixed capital, production of food products retains leading positions among industries. Over the last five years, the coefficient of renewal of fixed assets used in the production of food products has made 2.per cent as compared with the average industrial indicator of 1.5 per cent. The growing competitive power of production of food products on the modern technological base has been a factor checking growth in imports. On the market of non-food products, the situation has been aggravated by the fact that at the background of outpacing rates of growth in real household incomes, wages, and salaries low levels of activity of domestic businesses in this sector of the economy provokes aggressive import.

In spite of the fact that production of machinery and equipment grew at the rates (110.2 per cent in comparison with the figures registered in January through August of 2004) outpacing those observed in investment in foxed assets (109.7 per cent), was supported at the expense of outpacing rates of increase in imports of machinery and equipment (135.5 per cent). The disproportion of the structure of demand and supply, low competitive power of mechanical engineering branches in terms of quality, consumer properties, and prices enhance the trend towards growth in the share of imported machinery and equipment in the structure of investment. Under the given structure of domestic production of investment goods, imports remain a major source of renewal of fixed capital, reconstruction, and modernization of production.

This year, structural specifics of domestic demand were determined by shifts in priorities of growth from investment in fixed assets to final consumption of households. This year, the stable expansion of final consumption of households was determined by a gradual improvement of the social parameters of economic development. The increase in real household incomes observed in January through August of 2005 in comparison with the figures registered in the respective period of the preceding year made 8.5 per cent, whereas real wages and salaries grew by 8.3 per cent, and real gross pensions increased by 7.2 per cent.

Growth in effective household demand has determined an intensive increase in the turnover of retail trade. Similarly to the situation observed last year, the increase in turnover was primarily determined by the outpacing rates of growth observed on the market of non-food products. While in comparison with the figures registered in January through August of 2004 retail trade turnover increased by 11.per cent, the growth in sales of food products made 9.9 per cent, and increase in sales of non-food goods made 13.2 per cent. To a certain extent, these developments were determined by structural shifts in prices across major commodity groups. As consumer prices increased by 8.3 per cent in January through August of 2005, since the beginning of the year prices of food products have grown by 7.8 per cent, while prices of non-food items have gone up by 3.4 per cent. The increase in the amounts of retail trade turnover was supported by dynamic development of the sector of consumer crediting. In early June of 2005, the amount of credits extended to individuals made Rub. 803.4 billion having increased from the beginning of the year by 28.9 per cent. The share of consumer expenditures in the structure of utilization of cash incomes grew by almost 2.0 p. p. in comparison with the figures registered in January through August of 2004. The structure of household expenditures was also affected by increasing inflationary expectations of the population, what has been traditionally reflected by growing expenditures for purchase of foreign currency and more rapid rates of purchase of non-food items.

However, these developments as yet failed to significantly affect the propensity to save demonstrated by households. High investment activity of population with respect to construction of housing has been a factor checking the use of incomes for current consumption. In January through August of 2005, the share of housing built by the population at the expense of own savings and credits in the total amount of newly commissioned housing increased by 3.1 p. p. and made 49.6 per cent.

The stable outpacing rate of growth in ex-works prices of manufactured goods in comparison with the consumer price index was a factor determining the structural specifics of economic development in 2004 through 2005. Whereas in January through August of 2005 inflation rates on the consumer market made 112.5 per cent, the increase in the prices of producers of manufactured goods made 17.9 per cent.